Where Did All The Money Go? - Part 1

Written by: rebecca and filed Under Blog, Buyers, Real Estate |

Before delving into a home purchase, whether it be for the first time or the 10th, it is important to begin with the end in mind. By that, I mean knowing what costs are truly associated with purchasing and owning a home. With all the shake-up going on right now in the lending industry, I think it is very important that the consumer be educated. This will allow a consumer to make a more informed decision and hopefully prevent them from getting into financial distress down the road.

To facilitate this education, I am going to do a multi-part series on the various costs associated with the home purchase and subsequent ownership.

The term I want to focus on in part one of this series is down-payment. In recent years, there have been a multitude of loan products available to consumers, allowing for “zero down” transactions. While a few of these products will remain, those programs are not going to be so readily available to the majority of us out there. This makes understanding what a down-payment is very important.

A down-payment is the amount of money, usually discussed in terms of a percentage of the purchase price, that a buyer is bringing to the transaction that goes towards the purchase price of a home. For example if you were purchasing a $500,000 property and getting a conventional loan for 80% of the purchase price ($400,000 loan), you would be bringing 20%, or $100,000, of your own money to the transaction to fund the purchase. That $100,0000 or 20% is considered the “down-payment”. The greater the percentage of the down-payment in relation to the purchase price, the stronger and more qualified you, the buyer, appear. This not only reflects well to lending institutions, but to sellers as well. Generally speaking, the stronger the home buyer appears to the lending institution, the more favorable the interest rate they are able to obtain. Thus, it can be helpful to bring in a sizable down-payment. And with the changes in the lending institution, while it won’t become the only way to home ownership, it may become the least expensive way, at least in terms of interest rates - but more on that later in the series.

In order to determine the best financial strategy for you, it is very important to speak with an experienced mortgage consultant (if you would like a recommendation please feel free to email me). By speaking with them, not only can they get you pre-approved, they will be sure to consult with you on all your loan product options to make sure you make the best decision for you. Combine that advice with the skills of a professional real estate agent who can best present and negotiate your position, you will be on the road to a smoother transaction.

So when is this down-payment due?

The simplest answer is that it is due at the time of closing either via a cashiers check delivered to escrow 24 hours prior to closing, or via a wire transfer from your financial institution up to the morning of the day the transaction is to close. Most wire transfers need to be received by around 10:00 am in order for them to clear in time for the transaction to record with the county. (Note that if you choose to send the money via a wire transfer, your financial institution may charge you a service fee. Be sure to check with your institution first if this is a concern for you.) With that said, some of the down-payment may have already been delivered to escrow in the form of “earnest money”. If earnest money was part of your transaction, and it probably was, then that earnest money gets applied toward the total dollar figure ($500,000 + closing costs) the purchaser needs to bring to the closing table in order to completely fund the transaction. I will talk about earnest money and closing costs in more detail later in this series, so for now I won’t go off on that tangent.

In a nutshell, the down-payment is the portion of the purchase price that a borrower/purchaser is bringing to the transaction, with the balance of the purchase price coming from a lending institution.

Stay tuned for a break down on other terms such as: earnest money and closings costs as well as clarification on where the funds that make up a down-payment can come from and other related topics that a buyer must be aware of.

Comments

2 Responses to “Where Did All The Money Go? - Part 1”

Rhonda Porter on March 21st, 2007 8:44 pm

Another great post! I often find that first time home buyers don’t realize that closing costs are in addition to the down payment.
rebecca on March 21st, 2007 8:58 pm

Thanks Rhonda. I hope that the rest of the series is just as educational. I find that a lot of the first time buyers I work with have the same mis-understanding, so I thought I would share this information to help avoid last minute surprises at the closing table for other buyers out there.

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